Income Tax Free Social Security Benefits; Too Good to be True?

It is no secret that The Social Security Fund is in severe financial trouble. In years past, Social Security funds have been held by the government due to the ever-increasing debt. By over promising benefits, the government has tried to “quick-fix” or remedy the situation by introducing even more taxation of retirement benefits from Social Security. This tax is determined by the retiree’s MAGI (Modified Adjusted Gross Income), and the taxable portion of their Social Security would then be determined.


There is, however, a group of recipients that are not taxed on their Social Security benefits; single collectors with a MAGI under $25,000 and those filing jointly with a MAGI under $32,000. This is critical information to know and understand for those retiring with income greater than this, because for those with an income above this amount, the government will be taxing anywhere from 50%-85% of your benefits.


Those with higher income must not only worry about their main source of income affecting their MAGI, but income that is generated from IRAs, 401(k)s, Municipal bonds, equity accounts, and CDs, etc., all which accumulate and add to your MAGI.


One powerful tool to use here is to use the ROTH IRA conversion method. Though this method is useful, not everyone can take advantage of it, as this has income restrictions, as well as liquidity restraints. Another option is to convert other assets that are contributing to your MAGI to a maximum funded life insurance policy. This would provide a tax-free cash flow produced by policy loans which do not affect your MAGI.


Let me introduce to you a case study showing how much wealth one couple protected by adjusting their gross income to obtain their benefits tax free. A couple; 49 years of age, waiting to take their Social Security benefits at 70 years old. They have also planned on reducing their MAGI to under $32,000. The chart below illustrates the difference in cash flow between taxable and non-taxable benefits; about $1.2 million more spendable retirement cash flow by taking advantage of one of the above-mentioned methods.

While considering options to reduce and eliminate taxes at retirement, understand every situation is unique and different from your own. If you would like to learn more about this strategy, please contact our office to schedule a complimentary consultation.

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